SEBI Revised Core Settlement Guarantee Fund Norms 2026: What Changes for Commodity Derivatives Clearing

The Securities and Exchange Board of India has revised the stress testing and Settlement Guarantee Fund (SGF) coverage norms applicable to clearing corporations operating in the commodity derivatives segment. The revised framework, effective from early 2026, reduces the Z-score used for historical stress testing from 10 to 5, revises the coverage requirement to account for the simultaneous default of the top three clearing members (the Cover 3 standard), and provides regulatory flexibility for SEBI to grant exemptions in specific market conditions. These changes aim to align India's clearing infrastructure with global standards set by the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions (CPMI-IOSCO) while reducing the compliance burden on clearing corporations and their members in the commodity derivatives market.

Understanding the Core Settlement Guarantee Fund

The Core Settlement Guarantee Fund is a pool of financial resources maintained by a clearing corporation to cover losses arising from the default of one or more clearing members. When a clearing member defaults on its obligations (for example, by failing to deliver commodities or make payment on settlement day), the clearing corporation steps in to complete the settlement using its own resources. The Core SGF is the primary resource pool for this purpose. It is funded by contributions from the clearing corporation itself, from clearing members (in proportion to their risk exposure), and from penalties and other charges collected by the clearing corporation. The adequacy of the Core SGF is determined by stress testing: the clearing corporation simulates extreme but plausible market scenarios to estimate the losses that would arise from the default of its largest clearing members, and then ensures that the Core SGF is large enough to cover those estimated losses.

Z-Score Reduction: From 10 to 5 for Historical Stress Testing

The Z-score is a statistical measure used in stress testing to determine how extreme the simulated market scenarios should be. A Z-score of 10 means the clearing corporation must prepare for price movements that are 10 standard deviations away from the mean, which represents an extraordinarily rare event. SEBI had originally prescribed a Z-score of 10 for commodity derivatives stress testing, making India's standard one of the most conservative in the world. The 2026 revision reduces this to a Z-score of 5, which still represents a very extreme scenario but is more in line with global benchmarks. The reduction recognises that the commodity derivatives market in India, while growing, does not yet have the trading volumes or concentration risk that would justify the most extreme stress testing parameters. By calibrating the Z-score more realistically, SEBI reduces the amount of capital that clearing corporations and their members must lock up in the Core SGF, freeing resources for productive deployment while still maintaining robust risk coverage.

Cover 3 Standard: Simultaneous Default of Top Three Clearing Members

The revised coverage requirement mandates that the Core SGF must be sufficient to absorb losses arising from the simultaneous default of at least three clearing members (and their associates) that would create the highest credit exposure in stress scenarios. This is known as the Cover 3 standard. The earlier methodology was based on the default of 2 clearing members plus 50 percent of all clearing members, which in some cases produced a higher (and arguably disproportionate) coverage requirement. The move to Cover 3 aligns with the CPMI-IOSCO Principles for Financial Market Infrastructures (PFMIs), which require systemically important central counterparties to meet at least a Cover 2 standard (simultaneous default of the two largest members) and encourage Cover 3 for additional safety. By adopting Cover 3 as the baseline, SEBI positions Indian commodity derivatives clearing corporations above the minimum international standard while rationalising the coverage formula to produce more predictable and proportionate capital requirements.

Regulatory Flexibility and Case-by-Case Exemptions

The revised framework includes a provision for SEBI to grant exemptions or relaxations from the strict SGF requirements on a case-by-case basis. This discretionary power allows SEBI to respond to specific market conditions, such as periods of unusually low volatility where the stress testing parameters may produce overly conservative results, or situations where a clearing corporation's overall risk management framework provides adequate protection through other mechanisms (such as margin requirements, default fund waterfalls, or insurance arrangements) that reduce the need for a large Core SGF. The exemption power is subject to SEBI's assessment of the prevailing market conditions, the adequacy of the applicable risk management framework, and the overall objective of investor protection. This flexibility is important because commodity derivatives markets can behave very differently from equity derivatives markets, and a one-size-fits-all approach to SGF sizing may not be appropriate for all clearing corporations.

Implications for Clearing Members and Market Participants

For clearing members in the commodity derivatives segment, the revised norms are expected to reduce the capital that must be contributed to the Core SGF, improving capital efficiency. Members should review their contribution obligations under the revised framework and assess the impact on their working capital requirements. For clearing corporations such as NSE Clearing Limited, Indian Clearing Corporation Limited, and Multi Commodity Exchange Clearing Corporation, the revised stress testing parameters will need to be incorporated into their risk management models, and the results of the updated stress tests must be reported to SEBI as part of their regular supervisory reporting. For market participants more broadly, the alignment of Indian SGF norms with CPMI-IOSCO standards enhances the credibility of India's commodity derivatives market infrastructure, which is an important factor for attracting institutional and international participation in Indian commodity markets.